US Physical Therapy Inc (USPH) 2013 Q3 法說會逐字稿

Good morning. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Physical Therapy third quarter 2013 earnings call. (Operator Instructions)

I would now like to turn the call over to Chris Reading, Chief Executive Officer. Please go ahead.

Thank you. Good morning, everyone and welcome to U.S. Physical Therapy's third quarter 2013 earnings call. With me here are the usual group, our management team , including Larry McAfee, our Executive Vice President and Chief Financial Officer; Glenn McDowell, our Chief Operating Officer; Jon Bates, our Vice President and Controller; and Rick Binstein, our Vice President and General Counsel.

Before I open with some color on the results for the quarter and also possibly some comments that are forward looking, I'd like to ask John to cover a brief disclosure. Jon?

Thanks, Chris. This presentation contains forward-looking statements, which involve certain risks and uncertainties. And these forward-looking statements are based on the Company's current views and assumptions and the Company's actual results can vary materially from those anticipated. Please see the Company's filings with the Securities and Exchange Commission for more information.

Thanks, Jon. What I intend to do here is to provide some color primarily on our continuing operations, our core physical therapy business, including our Fit2WRK program. And the Larry will cover in some greater detail the actual results, including the effect of our discontinued operations, namely the osteoarthritis business that we've earlier in the quarter sold to our existing partners.

Hopefully, the combination of these discussions, as well as the clarity provided in the release will eliminate any noise in these quarterly numbers.

For the quarter, visits grew approximately 6.3% and net revenues increased 6% compared to the year prior quarter. Within the quarter, we realized slight decrease in the net rate per visit versus the year prior quarter. You remember that earlier this year, beginning in April, our industry got hit with two concurrent reimbursement reductions impacting Federal with some of our commercial payers. First, the MPPR reduction was announced and subsequently the impact from the budget sequester.

We believe the combined impact to the Company for this year, again, starting in April through year-end is approximately a $0.22 impact to earnings in 2013.

So, this year for us has been a flurry of activity designed to position the Company for 2014 and forward, and despite what we believe will appear to be a slightly downward earnings year in 2013 when it all shakes out, we think we have positioned the Company well for the coming period. This year, we've had to focus on a lot of different things and we've asked the partners to do a great many of these on a short runway and rebuild and refocus, so that we can be positioned solidly in the future.

One of the things that is taking up a lot of our time this year has been the osteoarthritis business, and as you know, we've sold that business to a partner earlier in the quarter, as we have earlier announced. This has freed up our operations team. In fact, it allowed us to create another region for the Company geographically. What this means for us is that our operations VPs and their teams are slightly smaller and more focused area geographically in order to really be able to dig in and mine out existing opportunity in the form of growth and volume, program development, cost controls and future development of their territories.

These changes will allow some of our states and partnerships to get a fresh set of eyes from an experienced and capable team in order to further our growth and position in those markets.

This year has been and will be by the end of the year one of the best development years this Company has ever produced and while some of that will fall later in the year, it should help position us well for the future. This week in Houston, we enjoyed having a large group of partners from around the country, made up of acquisitions completed earlier in the year, combined with partners and directors from existing groups who have been with us for a long period of time.

Last night, we were here late, reviewing some new and what I think is very exciting and innovative equipment that I look forward to deploying around the country, which I believe will further add to our ability to effectively [cater] to a broad range of customers at a very effective cost point, inject some excitement and enthusiasm into our facilities. See, right now in our industry, we are seeing and feeling what I believe is the beginning of what is a both very challenging and very exciting time. It's challenging, because consumer confidence has been tepid at best and overlaid with that has been a period of significant change in regulatory complexity that will continue, in my view, to push our market toward further consolidation. I believe very firmly that this environment, while difficult will actually help to spur our further growth. We're seeing that happen regularly as we network with and attract some very talented existing companies, who like us believe that the best future results in joining forces and combining talent that are complementary and supportive, allowing their talented clinical partners significant opportunity to grow with this fleet-type feeling that comes through knowing that they have a committed and capable financial partner, run by clinical people who have a passion for this business and who are here for the long term.

Now, we continue to have plenty to work on, opportunities on growth, which will be evident, as well as improving our core business. With all that we've had to do this year in a pretty short runway, we've made progress in many areas, but we have more work to do on the cost side of our business. In retrospect, I think we probably through too many adjustments and projects at our partners at the outset of the year in an effort to overcome the drag of that $0.22 expected MPPR and sequester impact. We need to and I expect that we will continue to make progress in these areas with continued time and focused effort. Within this third quarter, we saw a little softness in the early part of the summer, but a strong pickup in September in volume, making it the best average daily visit month of the year. And all indications are that volume remains very solid, as we've moved into this fourth quarter.

In closing, let me say that we are excited about this final push to complete a year. We're in a strong financial position with respect to our balance sheet and we expect to use that to our advantage to position us well for the near-term. I'm personally very optimistic -- I'm personally very appreciative of our partners and appreciative of the leadership and support teams here and around the country. It's been a challenging year. There is a lot to do. I remain excited and confident in our long-term ability to execute on our plan.

With that I would invite Larry to cover the financials in a more granular fashion, as well as to speak to our guidance for the remainder of the year. Thank you.

Thanks, Chris. As reported today, USPH's net income from continuing operations for the quarter ended September was $4.7 million or $0.38 per share. As Chris discussed, we sold the remaining piece of our former physician services business, which is treated as a discontinued operations for financial reporting purposes. Our EPS from continuing operations for the nine months ended September were $1.12.

I'll now talk about the quarter and then after that the nine month period. For the quarter, net revenue increased 6% to $65.8 million, as our patient visits increased by 6.3%, which was partially offset by about a $0.41 reduction in our average net rate per visit. The total clinic operating costs were 75.5% of revenue as compared to 75.1% a year earlier. This increase is attributable to over $4 million in operating costs from new clinics, offset partially by a reduction in operating costs of clinics that were a year or older by about $1million. The provision for doubtful accounts was 1.7% for the recent quarter, as compared to 2% a year ago. The gross margin for the third quarter increased to $16.1 million from $15.4 million. The gross margin percentage was 24.5%.

Our corporate office costs were 9.5% of revenue in both the 2013 and 2012 quarters. Our operating income for the recent quarter was $9.9 million, compared to $9.5 million in the 2012 third quarter. Our diluted earnings per share of $0.38 were the same for both the quarters. Our same-store revenue for de novo and acquired clinics opened for a year or more decreased 2% and visits decreased by 1% and the average net rate was down slightly.

Now I'll discuss the nine months results. Our net revenue increased 4.4% to $195.5 million, due to a 3.6% increase in visits and an increase in our average net rate of $0.73. Our total clinic operating costs were 75.2% of net revenue for the period, as compared to 74.1%. Again, the increase was primarily attributable to operating costs of new clinics. Provision for doubtful accounts for the first nine months of this year is 1.7% versus 1.9% same time last year.

Our gross margin for the nine-month period was $48.6 million or 24.8%. Our corporate office costs continued to run at 9.8%, the same as the percentage this time last year.

Our operating income for the first nine months was $29.4 million. Our diluted earnings per share were $1.12 as compared to $1.18 for the same period last year. Our same-store revenue and net rate -- same-store revenues business and net rate for clinics opened for a year or more were flat.

We issued revised earnings guidance today. We now expect the Company's earnings from continuing operations for 2013 to be in the range of $17.2 million to $17.8 million or $1.42 to $1.47 in earnings per share.

We also announced today our dividend for the fourth quarter. $0.10 per share, will be paid on December 6 to shareholders of record as of November 15.

Thanks, Larry. With that I am sure we have some questions. So, we like to ask the operator to open up the lines and we'd be happy to provide some additional discussion.

(Operator Instructions) Larry Solow, CJS Securities.

Hi, good morning guys. Chris, you mentioned -- it sounds like volume was a little bit weak in July and August. Those are seasonally slow months and the sequential recovery in September and sounds like that continued into October. Is that -- year-over-year it was back to sort of flat or is it still sort of down a little bit? And if it's on the higher side, is that -- what's driving your thought in the outlook or is it more on the cost side as well?

July and August is seasonally slower, you're right, and September is not a pickup month, it still starts back. But July and August was a little slower than we even expected.

And then, yeah, the revised earnings guidance, there's a couple of factors, one of which is volume is a little lower. There was a tick back up and on the cost side, as Chris mentioned, we were probably too aggressive in thinking we can get our cost reductions to-date.

Right. And I have a second question. I know you had implemented some cost cutting I guess in Q2 and I was going to ask, have you completed that or maybe not quite did what you expected to and was there more opportunities going forward?

There continues to be more opportunity for us in the cost-cutting side and we're continuing to take a look at that. If you look at the results in the earnings release today, cost per clinics a year or older, mature clinics, were actually down $1 million. So it's not that we haven't cut costs, but we have not cut as much as we hoped.

Got it. Okay, great, thanks.

Brian Tanquilut, Jefferies & Co.

Hey, good morning guys. Larry, just a quick question on the revenue per visit. Is there an explanation why it's down on a sequential basis? I understand the year-over-year, because of the sequester and MPPR. But on a sequential basis, what's the reason for that?

Well, I mean as Chris kind of alluded to, there were a couple of commercial insurance contracts that have followed the MPPR in a lot of them. There was a little impact from that. But the net rate per visit moves around quarter-to-quarter no matter what.

So, frankly, at this point, the reduction in net rate is less than we anticipated. So, because of all the programs and things we've worked on, we've been able to keep in that radar.

So to the point, Larry or Chris, do you guys think that the commercial guys following the MPPR cuts are done, meaning we shouldn't see anymore commercial clients doing that?

Yes. Honestly, I'd be tolerant of mistruth, I think, if I said that I had certainty on that. I don't know. I mean a couple of these guys came right out of the gate and said they were going to do it, and then it settled down. But my crystal ball on that is, at best, uncertain. I think where we are right now with the net rate in the near-term is about probably where we were going to be. We continue to make progress with Fit2WRK. As Larry mentioned, we've offset -- we expected a $0.22 impact through MPPR and a pretty good impact on the net rate. We've been able to offset some of that, not all of it. But I think with all that we've done with this year is when we end the year, I think we'll be well positioned for what things look like going forward.

Thanks for that comment, Chris, and actually it's a good segue to my next question. In Fit2WRK, I know in the past few quarters you've given us some anecdotal information on the gains that you're seeing there. Just wanted to hear in terms of the new client wins that we're seeing from Fit2WRK if there are any?

Yeah. So, we've been in -- recently in some new markets, I'm a little reticent to name companies, because some of these are pretty new and we usually like to get full releases from the companies before we make announcements. And personally I don't have it at my fingertips, but I know, for instance, in one of the markets where we completed a really nice acquisition earlier in the year. We've got a couple nice companies on board in that market in a pretty short period of time. [Larry] continues to travel and speak at national conferences every week and meet with large companies, we've got new pilots and new contracts that are happening each and every week. And so that continues to roll forward. We need to clone a few more of our existing people and we're looking at that. And we're also looking, Brian, at a company and some other opportunities to broaden our offering in this area that will continue to be complementary. And so some of our focus currently and for the coming year are going to be with how can we continue to grow that at an even more accelerated pace, because it's done very well for us.

I think, Chris, in your prepared remarks, you said that this is your best development year so far. If you don't mind just giving us more details on what you're seeing, I mean is that a pipeline view in terms of M&A, and also just wanted to hear your thoughts on your appetite for doing larger deals, considering that -- I think there are one or two assets out there for sale today?

Yes. So far this year, you're going to see a couple of things. You're going to see an organic development year which looks similar to what we've done in the past. Most of those will be strong satellites with existing large partnership groups. You will see by year-end a very what will have been a very active acquisition year. We've talked to -- need to be careful exactly what I say -- but it will be a very good year when it all settles, both in deploying capital and bringing on some additional talent growth as we look forward. And, I think as we're participating in the Private Practice Convention in New Orleans this week with people on the ground, we're having a lot of active discussions, and I think the environment just bodes well for us, not only the environment externally, but the environment here in the Company, where people are able to continue to keep their culture intact and the brand and get a lot of support from a company like ours. And so, with our balance sheet, we have a lot of room and we expect to use up some of that in the near-term.

Brian, as you know, we are under (technical difficulty) net debt less than $5 million at the end of the quarter. We have a nice large credit facility that we can use for acquisitions with Bank of America. The Bank has been unbelievably supportive. So if there's opportunities out there, we are not afraid to spend the money and leverage up a little.

Again, Larry, last question for you, just housekeeping. That other revenue line, now that you've divested the physician practice or the physician business, does that go away going forward?

We still have -- we have some other revenues that come in --

It's just the management contract.

Yeah. And then we have some others, but it'll be smaller for sure.

Okay got it all right. Thanks guys.

Thanks, Brian.

[Dan Brown, Financial Management].

Hi guys, good morning. I wanted to clarify, the $0.22 drag this year, if I heard you right, Chris, is relating to the April through December period?

That's correct.

So, we should assume in that there is a further drag in the first quarter of next year before we're apples to apples?

Before we will be apples to apples, up through -- MPPR started in April. So the first quarter will be impacted on a comparative basis, that's correct, and from both sequester and MPPR, assuming all else remains the same, which is what we expect right now.

And is there any way that you can talk to the impact of ObamaCare on the business in general?

Yes, that's probably a long discussion, maybe longer than we have for this call. You know without injecting too much personal color, I think at the end of the day, assuming that they can get people signed up and that more people are insured that there's some mild net positive in there. Pulling against that there is some pain in the neck stuff that companies, not just ours, but all companies have to do. Laid on top of that is the big tax bill, and while that doesn't necessarily affect us as a company, it affects individuals.

But, I think at the end of the day, assuming that millions more people get coverage and some of those are working folks and people who are self-employed that maybe couldn't afford it before, small businesses and other things, I think at the end of the day it's net positive. I wish they had gone about it in a more rational way, but it is what it is at this point.

Great, thanks very much. Appreciate it.

Thanks, Dan.

[Max Quintell, Parason Group].

Good morning, guys. Larry, this is kind of building on the last question a little bit. One of the things that we wonder about is how the payor mix might change with an increase of volume as more people enter the marketplace. Can you talk a little bit about your expectation for, whether you see a payor mix change for the business and what that might be to revenue?

I don't think we'll see much of a payor mix near-term. I'll give you -- I'll go ahead and give everybody what the mix was for the most recent quarter. We had about 53% from private or insurance, workers comp was about 18%, Medicare and Medicaid combined was about 23%. So those statistics have moved around more than a percent or two. As people get -- join these exchanges and whatnot that will be reported as insurance. But in terms of how much the incremental volume will be, I think it's anybody's guess.

Great, thanks. And just one more. I am a little interested in thinking about how future or how the pricing lever might be used to increase net patient revenue per visit. Can you talk a little bit about where you guys see, if you guys see at all, there might be gains or the things that you're worried about on pricing?

So, I am not sure on the question relative to lever as related to the environment with the ObamaCare. But yeah, I mean, I think, right now there are a variety of different discussions. Congress has said that they want CMS to come up with on a long-term basis an alternative pricing proposal that would be good for the industry that eliminates gaming and is more focused on outcomes and function. I think those are longer-term, multi-year objectives. I currently see the current environment as being relatively stable. I don't see there being massive downward pressure, I don't see there being massive upward opportunity.

So, I think we get pricing change if we can enhance them through very subtle changes in our payor mix and continued focus on Fit2WRK and other things. And potentially geographic representation has reduced deals in certain areas, which have a little higher pricing elements built in from the beginning. So those kind of things may move us around a little bit. Environmentally, I think, near-term at least, I think it's pretty steady. Over a really long-term period it would be anybody's guess.

Great, thank you.

(Operator Instructions) Mitra Ramgopal, Sidoti.

Hey, Mitra.

Yes. Hi, good morning. Just a couple of questions. First, Chris, you sounded pretty upbeat regarding the opportunities on the acquisition front and I was just wondering if you've started to see some fall out in terms of providers aren't able to cope with a more difficult reimbursement environment?

Yeah, I don't want to say that the guys that we're talking to and that we expect to transact with are -- that it's the result of a fallout. I think they're still optimistic and very capable people. We're very excited about them. We're excited about the deals that we've already done this year. These aren't guys that are running scared and I they are people who recognize that in the current environment it's actually a benefit and an opportunity, remembering that they're keeping a decent stake in the business, partnering with somebody who can help them get and enact their vision, to get to where they want to be. And so for really small providers and those we're seeing our tuck-in activity pick up as well. Yeah, I think that they are somewhat impacted by what you would consider the fallout. The bigger providers, the ones that [perform] through acquisitions, I think there's an opportunity with everything going on in the market to shore up the team and then they hit the gas again. And so that's really kind of the difference between those two groups.

Thanks. And particularly, I think you mentioned a little in terms of looking at some new technology or equipment, so they would be expecting you to make some significant investments on that front in light of reducing on your reimbursement?

Yes. No, actually this stuff is -- it's very, very interesting, but it's decidedly not particularly expensive. And if you were to see it, you would think it was low tech and I think it's got some cool elements to it. We previewed it a few weeks ago, we did a demo here for our partners last night, got some feedback from them. Personally I like it a lot of, but it will not even register on our spend sheet at the end of the day, you will not notice the difference.

I mean, we spend about $1 million in CapEx a year and we should continue to do that. When I say $1 million in CapEx that's excluding new clinics and refurbishment of older clinics. So the business is not capital intensive.

Yeah. That's a quarter, right?

No, for a year. If you take out all the developments, only about a $1 million in CapEx.

Okay, though, that's very helpful. Thanks.

At this time we have no further questions.

Okay, guys, we're here for the rest of the day. I know some of you've had to jump into other calls, but you have existing questions that didn't get answered, give Larry or I a shove, we're happy to spend some time with you on the phone. We appreciate your time and attention this morning on our call. Thank you and have a great day.

Thank you. This concludes today's conference call. You may now disconnect.